When Brian Cowen became Irish Prime Minister in 2008, Ireland was regarded as one of the great economic success stories of the last 30 years. It had recorded stellar growth rates, sometimes reaching double digits. Her citizens grew wealthy as Ireland’s per capita GDP became among the highest in the world. Every small emerging market country wanted to be like Ireland.
From the moment that Brian stepped up to the top job, things started to fall apart. The financial crisis kicked off in September 2008, and threatened to take down the Irish banking system. As Lehman's bankruptcy papers were heading to a New York Court, Irish bank depositors became nervous. Brian prevented a run on the banks by offering a blanket state guarantee on all bank deposits. The generosity of that offer forced the rest of Europe to follow.
The guarantee provided only temporary relief. The crisis exposed Ireland’s over dependence on the property market. Despite the bank guarantee, a string of Irish banks failed, leading to one of the most catastrophic declines in output ever experienced by an industrialized economy. Government debt exploded, while the financial system imploded. Unemployment is rising, the housing market is crashing, and the government deficit is as wide as the Irish Sea.
His party will almost certainly be destroyed as soon as he calls an election. Rather than face the ignominy of a wipeout at the ballot box, many of his cabinet colleagues are throwing in the towel, and quietly going into retirement. Few politicians have ever experienced the reversal that poor Brian has faced. But how much of this calamity is the responsibility of poor Brian?
Unfortunately, he doesn't have a strong defence. He was a permanent feature of the Irish cabinet since the early 1990s. He was finance minister from 2004-2008.
He could argue that since 1999 the Irish state was no longer responsible for monetary policy and the years of excessively low interest rates that that fuelled the Irish bubble. That task had been delegated the ECB. But it was the Euro that did in Ireland. It was the single currency that created the conditions for the huge rise in property values, and a decade of grossly irresponsible banking. It was Brian and his Cabinet colleagues who are responsible for lumbering Ireland with the Euro.
Brian is the first of our bubble men - the villains that fashioned the great financial catastrophe of our age.
4 comments:
If the Irish had adopted a land value tax they could have avoided the real estate bubble. I know it's fashionable to blame the Euro or low IR's, but I'm going to disagree with the Austrians and say that neither of these things caused the boom.
Germany made the Euro work, which indicates that it's a fundamentally sound currency. It was Irish fiscal policy and Greek corruption that broke it, but both of these failed policies would have been followed sans the Euro.
Chef
I commented elsewhere on this.
Interest rates are not the only mechanism a government has at its disposal. There are capital gains taxes, restrictions on mortgage lending, rent controls ( practised in other Eurozone areas ) and these are before we even get creative.
This failure is not solely the result of the Euro. We have had exactly the same bubble in the UK without membership.
It is a political failure. Politicians have been happy to pretend everywhere that they were delivering low inflation growth by stoking up a construction bubble. That bubble brought high tax revenues to treasuries, and it appears in many places, brought high personal rewards for those politicians personally, for their families, and for the political parties in receipt of developers donations.
Low interest rates were a fiction, based on controlling an arbitrary inflation target which was met mainly by the considerable deflation everyone imported from China feeding into inflation figures.
Does anyone seriously believe their food or fuel or price of a cup of tea inflation has been only a couple of percent these years?
Its a confidence trick. The politicians are quite squarely, and deliberately to blame.
Mark Wadsworth did a nice drawing of me.
Cowen will be just fine - probably turn up at Goldman Europe.
You make sure your buddies are taken care of at the expense of the taxpayer, your buddies take care of you.
Sleep tight Brian...there's a reckoning in your future.
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